Thursday, 29 June 2017

Today’s post previews a forthcoming
article by this author entitled “Credit Rating Agencies and the Protection of
the “Public Good” Designation: The Need to Readdress the Understanding of the
Big Three’s Output’, to be published in the Business Law Review
(the pre-published version can be found here).
The article, which aims to promote another reason for why the credit rating agencies
not only survived the Financial Crisis, but increased its profitability, suggests
that an underlying sentiment that exists within academia and policymaking
corridors fundamentally protects the agencies’ position in an ideological
manner. The proposal in the article is that by a. revealing this sentiment, and
b. correcting that sentiment, we can begin to build an environment whereby the
regulatory, legislative, and judicial focus is aimed more accurately, so that potentially a truly effective deterrent
can be established. So, with that in mind, we will examine just some of the key
components to the article in this post, and draw out some of the conclusions
found in the research.

The article begins by examining the
notion of rating agencies being vital for the economy in detail, in order to
reveal why that notion exists, and from angles it is promoted. The reason for
this is that by analysing why this overriding sentiment of importance exists,
where it comes from, and why it comes from those channels, we can begin to
unravel the myth and position the focus on the agencies more effectively.
However, at the very beginning of the article an important point is made
abundantly clear: the proposition of the article, that there exists within
academia especially a narrative which supports the agencies’ position is both
innocent – i.e. it is not, to all intents and purposes, developed and maintain maliciously
– and also not widespread – there are a number of academics who perpetuate this
sentiment, but there are many who do not. The reason why this is an important
clarification to make is because academics, from a number of disciplines
(Economics primarily), have been accused
of being complicit in the creation of the environment that allowed for the
Financial Crisis to materialise – this is not suggested to be the case here;
the likely scenario is that some academics have fallen into the trap of
believing in the ideological version
of a rating agency, rather than
focusing upon the actual rating
agencies, which is the crux of the article. There is a constant dichotomy
between looking at the agencies as one would desire them to operate before looking at how they actually operate, which can only even
lead to one outcome: mis-regulation.

After looking at this perceived importance of the agencies in
terms of their usefulness to the economy, from the viewpoints of investors,
issuers of debt, and also the State in the ideological stance of the supervisor
of society that is centred on the marketplace (putting people’s respective
political allegiances aside for one moment), the article continues by looking
at this notion of ‘Intellectual Sustenance’. This term is promoted as the
understanding that something underlies the position of the agencies, rather
than just circumstance: and that understanding focuses on the term ‘public good’.
Although it is rather crude, there is evidence in the literature of the term
being used in its theoretical sense (from the ‘public choice’ school of
economic thought) and the literal sense of the output being ‘good’ for society.
In turn, the economic notion of a ‘public good’ is, in layman’s terms, related
to the word ‘good’ as meaning a product. For a ‘public good’ to be a ‘pure
public good’, it must contain two specific qualities: it must be ‘nonexcludable’
– which means that once the product has been provided it is difficult, if not
impossible, to exclude others from receiving the benefit of that good; think
the light from a streetlight – and it must also be ‘nonrival’ – which means
that the product can be consumed by one person without detracting from the
opportunity of another person to consume that same good; think algae that
consumes carbon. The theory goes that it is the State’s responsibility to
produce and maintain the provision of these goods because a. they are usually
socially positive products, and b. a private company that serves to derive
profit cannot derive profit from a good that is universally consumed without
exclusion – profit is usually derived from exclusion. However, one leading
theorist – Ronald H. Coase – argued that quite often the State will not be the
most optimal provider of the public good for a number of reasons stemming from
a lack of ability or appetite to properly fund the production of the good, to
conflicts of interests against other competing pressures that any State will
have to balance. To alleviate this problem, the theory goes that a ‘public-private-partnership’
will be induced whereby a private company is incentivised to provide the good
by way of the State allowing for the reduction in one of the two key components
of a public good. Rather than provide an abstract example to demonstrate this
scenario, we have a perfect real-life example with which to do so: the credit
rating agencies.

Before the late 1960s, credit
rating agencies sold their ratings to investors. This system was not
particularly profitable for a number of reasons ranging from an widespread
amnesia within the United States that there was little need to be too concerned
with ranking creditworthiness (the oft-argued reason), to rival companies undercutting
their business with inflated ratings (the real reason). Before the collapse of
Penn Central in 1970, the National Credit Office, which was the rating vehicle
of Dun and Bradstreet – an amalgamation of two of the oldest credit reporting agencies and direct competitor
to the rating agencies we know today – were busy awarding ‘prime’ credit
ratings to large railroad companies in spite of being aware of an impending
economic disaster (sound familiar?). The widespread faith in these ratings
developed into a widespread panic once the massive Railroad company collapsed,
and investors scurried to find alternative forms of creditworthiness rankings –
step forward S&P and Moody’s. At the same time, however, advancement in technology
saw Photocopying machines become commonplace, which fundamentally affected the
rating agencies’ ability to exclude
people from disseminating the rating they received in physical form – a process
known as ‘free-riding’ whereby one purchases the rating and then disseminates
it to others, leaving the rating agencies unable to charge those others for
acquiring their products. Ingeniously, Moody’s began the process of charging issuers to be rated, on the basis that
investors needed to be reassured of an issuer’s creditworthiness since the Penn
Central collapse (although Moody’s did experiment with this model a year
earlier). The now infamous ‘issuer-pays’ model was therefore established, with
S&P following suit in 1974. Now, where the public-private-partnership comes
in is with the Security and Exchange Commission’s ratification of the process
in 1973 (formally ratified in 1975) when it instructed brokers that the usage
of ratings needed to come from ‘Nationally Recognised Statistical Rating
Organisations (NRSRO) – the agencies had been formally allowed by the State to
conduct the sale of a required good in a manner where it could be compensated.
Coincidentally, the State had failed to consider the effect that this systemic
switch had created, with research confirming that the rating agencies substantially inflated their ratings
once issuers were paying for the ratings, which flies directly in the face of
this notion of the output of the agencies being ‘good’ for society. Yet, this
system allows for academics to declare that rating agencies are, by economic definition, a ‘public
good’, because they now tick both boxes of containing nonexcludable and
nonrival characteristics – i.e. the ratings are freely available, and everyone
can use them because the issuers pay for their production. However, research
confirms that what is ‘freely available’, as the rating agencies themselves
declare, is of such low quality in terms of content and timeliness, that the
freely available ratings constitute nothing more than ‘advertising messages’
which are conveniently located behind
pay-walls – something which instantly removes the ‘public good’ moniker once
realised. Yet this has not stopped that categorisation being advanced; but,
however, it is not the only one.

The article then provides examples
of academics appropriating the public ‘good’ version of the understanding to
the agencies, by stating that ratings can be considered alongside infrastructure
and energy provision in terms of social usefulness. Yet, this is clearly not
the case when the majority of investors are bound – both internally and
latterly, officially, externally – to use them and then only factor the ratings
in to a much larger statistical endeavour. Furthermore, the ‘good’ element is
hard to find when we look at the investigations into the Financial Crisis which
show, quite clearly, that ratings were inflated for profit, and also
miscommunicated to investors for the benefit of the agencies and the issuers –
which, in simple terms, means fraud and criminality. The article concludes this
section by affirming that both understandings focus on a rating agency which simply does not exist in reality. The rating
agencies that do exist in reality
actively operate in the opposing manner to that which is described by these
prevailing narratives.

Ultimately, the article’s
conclusion makes the point clear that not only does this dichotomy exist, but
it is actively providing a façade for the agencies to operate behind and, to be
clear, they are hiding behind it. In
order to rectify the problem of the rating agencies, there are a number of
actors which must play their part. Legislators and regulators must be fearless
in their pursuit of justice against such obvious, disrespectful, and widespread
fraud – whether or not $2 billion in fines does this is another story and, in
my forthcoming book Credit Rating
Agencies and Regulation: Restraining Ancillary Services, I argue that it
does not come close. Yet, scholars have their own role to play, and almost as
one that role must be played emphatically. It is now important that the perception of rating agency regulation
is fundamentally altered so that whenever
the words ‘credit rating agencies’ are used, a clear definition of whether one
is referring to the ideological and generic rating agency, or a real-life
agency accompanies the analysis. The reason for this is clear: policy makers
rely upon this theoretical background to make decisions, arguably, and credit
rating agencies have proven, beyond doubt, that the credit rating industry is
no place for ideology. We all must be emphatic and consistent when we speak of
the rating agencies and proclaim them to inherently self-interested, venal, and
ultimately societally-hazardous. There can be no room for the argument that
their corporate bond ratings are consistently accurate because bubbles are
often caused by financial instruments like that witnessed in the 1980s, 1990s,
and predominantly in the 2000s (looking at the lead-up to the Great Depression,
one will see the overwhelming presence of ‘securities’ there too) – only by consistently making it clear that these
agencies cannot be trusted to put
anyone before their interest, in any form, can effective regulation be imagined and ultimately implemented.

The Treasury report is the first of a number of reports that
are due in the coming years. The reports are important because we can see, in
black and white rather than on Twitter, just how President Trump envisages the
financial system and how it should operate. With that in mind, the opening
gambit of the report is telling. The approach of the Treasury, now controlled
by Steven Mnuchin who we have covered previously here
in Financial Regulation Matters, is
attached to what they are calling the ‘Core Principles’ which, derived from an Executive
Order, range from ‘Empower[ing] Americans to make independent financial
decisions and informed choices in the marketplace’, to making ‘regulation efficient,
effective, and appropriately tailored’. In this specific report, the focus is
on Banks and Credit Unions, with the underlying sentiments focused on ‘breaking
the cycle of low economic growth’ and ‘better fulfilling the credit needs of
consumers and businesses’, predominantly. With regards to ‘economic growth’,
the report is forthright in its focus on the decontextualised understanding
that ‘the U.S. economy has experienced the slowest economic recovery of the
post-war period’ – the report is clearly downplaying what the Economy is
actually recovering from, as there is nothing to compare it to in the ‘post-war’
period. On this basis, the report singles out the Dodd-Frank Act and its
ensuing regulations, stating that ‘the
sweeping scope of and excess costs imposed by Dodd-Frank’… have resulted in a
slow rate of bank asset and loan growth’, and that the regulations ‘created
a new set of obstacles to the recovery’. This recovery, according to the
report, can only be realised by a prosperous banking sector and ‘an extension
of credit to consumers’, which brings us to the second component of the report.
With regards to credit, the report states that ‘the largest stalled asset class
is residential mortgage lending’, which is supposedly due to the ‘lack
of tailoring and imprecise calibration in both capital and liquidity standards’.
In relation to this, there was an extensive focus on the issue of costs
emanating from compliance, with it being advanced that ‘increased
oversight and regulation has led to an increase in compliance costs’.
Residential mortgages, a market which was dogged by systemic fraud, is an
important aspect for the report, with the overriding sentiment being that there
needs to be a ‘careful
study of regulations and the extent to which they may be holding back the
supply of mortgage credit’ which is obviously music to the ears of the
financial sector – the Financial Services Roundtable gleefully declared that ‘today’s
report is an important step towards modernising America’s financial regulatory
system’. Yet, whilst the financial lobbyists prepare for their celebrations,
there are a number of extremely important, and extremely worrying developments
that emanate from the report.

The first is an issue that is currently on the lips of
regulators in the U.K.: capital requirements. Yesterday, and pre-empting
tomorrow’s post in Financial Regulation
Matters somewhat, the Bank of England increasedthe capital requirements of Banks in the U.K. because of fears regarding
excess lending – more specifically, fears remain over the easy access to credit
for those who are not in a position to repay given potential shocks to the
marketplace, something which we have discussed in Financial Regulation Matters with regards to the ever-growing
auto-loan bubble. Yet, the Treasury’s report states that only ‘internationally
active’ banks should be subject to capital requirements (a move aimed to
unleash the speculative capacity of national institutions), and that for those ‘internationally
active’ banks there should be a more rigorous test, like taking into account
the ‘banking
organisation’s historical experience’, as opposed to any more qualitative
or quantitative measures. In opposition to the fears in the U.K. and around the
world, like in China
for example, the Treasury is adamant that Americans need access to more credit,
not less, and the only way to do so is to fundamentally incapacitate the CFPB
who, according to the report, hinders consumer access to credit. In order to
achieve this end, the report suggests that the Director of the CFPB should removable
at the will of the President, or alternatively be restructured as an
independent multi-member commission (which could then be gutted from the inside
out), funding the CFPB through an annual process (killing the Bureau by denying
it oxygen i.e. funding), and incredibly ‘curbing abuses in investigation’,
whatever that may be. This aspect, as
suggested in the media, is unlikely to go down well with Elizabeth Warren,
the Senator for Massachusetts, a leading voice in the creation of the CFPB, and
a vocal critic of President Trump. The report details a number of proposals,
but these headline-grabbing suggestions offer more than enough for us to
understanding the sentiment of the rhetoric.

The Trump Administration is, in no uncertain terms, readying
itself for a major assault on the safety of American consumers, and global
citizens moreover. The blatant rejection of global fears regarding the
consumer-credit bubble that is growing, when considered in relation to the fact
that the last crisis was only 10 years ago, is not only irresponsible, it is
dangerous. The blinded rhetoric that looks at ‘growth’ independently of the
reasons for the lack of it, are nothing short of a confirmation that history
will judge this phase of American politics with damnation. The Executive
Director of ‘Americans for Financial Reform’ responded to the report by stating
that ‘the financial crisis had devastating costs for families and communities’
and that ‘we
need more effective regulation and enforcement, not rollbacks driven by Wall
Street and predatory lenders’, which is not only accurate, but perhaps even
an understatement. What is clear, however, is that when Donald Trump repeatedly
stated ‘America First’ during his campaign trail, he was misunderstood; he was
referring to the American elite, not the American people – this report is the
first of many that articulate that reality.

Tuesday, 27 June 2017

On many occasions here in Financial Regulation Matters we have looked at the troubled bank
RBS, whether in relation to its continued
malaise since it was bailed out by the British taxpayer, or whether in
relation to the potential
court cases that were threatened with regard to the Financial Crisis. With
all this in mind, it is not hard to see why the recent news that the Bank is to
cut 443 jobs and move the respective teams to India instead is causing quite a
stir. So, in this post the focus will be on this outsourcing and the subsequent
debate, but also whether bailing out a troubled bank should be the foundation
to enforcing loyalty to the given
country, as a number of people are suggesting in the wake of RBS’s recent
declaration.

The particulars of the RBS bailout in 2008 will not be
repeated here, but the headlines of a £45
billion bailout and combined losses of £58
billion since tell the story clearly enough. It is against this background
that the recent news emanating from RBS is causing such consternation; it was
announced towards the end of last week that, as part of its restructuring, the
bank would be moving
443 jobs in the division that arranges loans to small business to India,
where it has a growing presence which now stands at around 12,500 people. The
bank claims that the redeployment is due to it now being a ‘simpler,
smaller, bank’, whilst it would offer assistance to affected staff by
moving them into other
divisions where possible. However, the Unite Union has been quick to
lambast this move, making its position quite clear when it stated that ‘RBS
will be getting that work done more cheaply at the cost of jobs and livelihoods
here in the U.K.’, with the Chairman of the Federal of Small Businesses
adding that the move was the ‘wrong way to rebuild trust’;
considering this news comes on the back of news in May that the bank would be
moving 250
I.T. jobs in the same direction, the issue of trust is clearly an important
one to consider. However, should it really be the case that being in receipt of
taxpayer funds binds you to that country?

Putting the extremely important issue of the Bank’s strained
relationship with small and medium businesses aside for one moment, the
issue of the effect of a bailout is
just as important. The national officer for finance at Unite stated that the
move to outsource is ‘interesting
for an organisation that owes its existence to the British taxpayer. We feel
RBS has a moral responsibility to try wherever possible to keep work here in
the U.K.’, a sentiment which moves the debate into much more ideological,
and murkier waters. This notion of morality raises important questions about
what the purpose of a bailout is: on
the one hand, the aim is to prevent crisis but have the taxpayer’s money
returned as soon as practicably possible; on the other hand, that assistance
comes with the expectation that the private institution will be more
sympathetic to the plight of the host country. In reality, well in 2017 at
least, the former holds true – the neo-liberal sentiment is to break out the
champagne whenever an entity is returned to private hands, like the situation
with Lloyds Bank recently.
Yet, this viewpoint does not consider the losses suffered by the taxpayer
during the period of public ownership – the savage cuts that seriously affect
most people’s way of life – which ties into the viewpoint of the Unite officer.
So, it seems we are stuck in an ideological dichotomy whereby the faster return
to private hands puts money back into the public fisc, whilst the methods used
to achieve that goal actively affect
the citizens who have had their way of life affected to provide the assistance
in the first place. This ideological dichotomy is academic, really, because
neo-liberalism is alive and well and the notion of a private institution doing
anything to promote the social advancement of any nation is almost alien in
this day and age, so they question then is why is the move by RBS even
surprising? If, and that is a
gigantic ‘if’ RBS ever return to the private ownership, there will be
declarations by the Right that the marketplace has triumphed, but this in
itself is an interesting notion. For some reason, the pro-market stance is
getting stronger despite the obvious evidence in front of us every day that the
market cannot be trusted to maintain itself – we live in a world where the
market is cherished, and state intervention is ridiculed, even though the
market continuously flirts with obliteration until the state intervenes (the recent
news from Italy testifies to this) – this abhorrent attack on the public
cannot continue at this pace. Irrespective of the health of RBS, experiencing
cuts to welfare, public services, and other key components of the national
health, just to see the very people responsible inflict further misery in the
name of their own advancement, represents the nature of the neo-liberal
approach. Although the recent elections in the U.S. and the U.K. do not support
this following notion, it is surely the case that history will judge this era
in a particularly damning light; RBS represents the pinnacle of what must be
changed if society is to advance in any decent and humanist way.

Monday, 26 June 2017

At the beginning of the month, we discussed here
in Financial Regulation Matters the
state-backed rescue of the world’s oldest bank – Monte dei Paschi di Siena (BMPS)
– and what it may have meant for the issue of ‘too-big-to-fail’. Over the past
weekend, news emerged from Italy that confirmed that the deterioration of BMPS
was, as
had been predicted, only the start of the troubling financial environment
that is enveloping Italy at the moment. With the Italian Government receiving
the support from the European Commission to provide financial assistance to two
Venetian banks – Banca Popolare di Vicenza and Veneto Banca – the Government
duly ‘bailed-out’ the two banks to the tune of €5.2 billion, with additional guarantees
of €12 billion being put in place. In this post we shall therefore assess these
recent developments, but then it will be important to ask what this means for
the role, better yet the belief in
financial regulation as an ideal – if the financial elite are conscious of the
fact the institutions they represent will be ‘bailed-out’ with taxpayer money
in times of crisis, what really prevents them from taking excessive risks? With
the noticeable lack of punishment after the financial crisis bail-outs, the new
millennium is seemingly being defined by a systemic lack of deterrent which,
potentially, means that news like that emanating from Italy may be the new
normal, or perhaps it has been that way for a while.

The biggest fear for Banking regulators and politicians is a
‘run’ on a bank, which essentially denotes the collective
panic to withdraw funds from a failing bank. It was for this reason, predominantly,
that Italian banking ministers took action on Sunday to wind-down the two banks
in question, with the process entailing the banks being split up into ‘good’
and ‘bad’ banks – in terms of assets – with the good assets being acquired by
the largest retail bank in Italy, Intesa Sanpaolo, which as part of the deal
also saw the Government provide
€5 billion to Intesa. As for the ‘bad’ components, the Government will foot
that particular bill to the tune of €12 billion, which takes the bail-out to a
likely total of €17 billion as it is assumed the quantification of the amount
of ‘bad’ loans controlled by the banks is accurate. The move to dissolve the
banks came after an announcement on Friday from the European Central Bank that
the two lenders were ‘failing,
or likely to fail’, which allowed the Government to bring an end to
attempts to resolve this issue privately and circumvent the supposed viewpoint
of the European Union: ‘taxpayers
are no longer meant to stump the cost to rescue a failing bank’. The
government’s response was staunch, with the Economy Minister stating ‘those who criticise us
should say what a better alternative would have been. I can’t see it’, with
the European Commission’s Competition Commissioner supporting the action,
ultimately suggesting that the provision of state aid would ‘avoid an economic
disturbance in the Veneto region’. Whilst this may be the case, some of the
details will be extremely disheartening for the Italian taxpayer.

The first point to mention is that it is predicted that even
though the ‘good’ components of the banks are being transferred to Intesa,
along with €5 billion, there could be up to 4,000 job losses and the
closure of many branches is a distinct possibility. Also, it will provide no
comfort for the taxpayers footing the bill that senior bondholders have been
protected from suffering losses, with those
bonds being transferred to Intesa as part of the deal – the Government were
able to skirt the rules imposed by the E.U. – that investors pay the penalty
for bank failures, not taxpayers – by invoking a ‘public interest’ clause that
argues the bank failures would have ‘wrecked’
the economy in the region. To perhaps rub salt in the wounds, the news at the
time of writing is that the value of the bonds are soaring
on the back of this governmental protection, which is unlikely to reduce the
amount of criticism towards the situation. German Politicians have been quick
to show their displeasure – given their status within the Union – with MEP
Markus Ferber declaring that ‘with this decision, the European Commission
accompanies the banking union to its deathbed’ and that ‘the
promise that the taxpayer will not stand in to rescue failing banks any more is
broken for good’. This point is crucial, as the situation is continually
developing. News has just broken that the recapitalisation
of BMPS has just been formally completed, which comes after news that the
large Italian lender UniCredit is also experiencing problems which have seen it
tap the marketplace for financing on three
separate occasions since the Crisis. The recent rescue of the Spanish bank Banco
Popular saw junior bondholders and shareholders suffer losses instead of
the taxpayer, but the Italian taxpayers have not been so lucky this time.

Yet, whilst the news is bad for the Italian taxpayer, it is
even worse in the grand scheme of things. The proclamations stemming from the
E.U. regarding the end to taxpayer bailouts has been proven to be false, which
hints at a much bigger issue. The appropriation of the ‘public interest’
defence means that banks can and will be rescued, despite any political
rhetoric to the contrary. The news that the major U.S. banks have passed
the first phase of their annual stress testing, in spite of some worrying
news, arguably means very little in the modern environment because,
unfortunately, the Financial Crisis produced an extremely anti-social
precedent: the taxpayer will be
forced to rescue a filing bank, particularly if its interconnectedness is such
that its failure would have systemic effects. Whilst many would presume this to
be just i.e. a banking crisis could affect our way of life, what does it mean
for the ‘balance’ within society? At the moment, there is very little deterrent
for the leaders of a banking institution to act responsibly: will they be
imprisoned for their negligence? No. Will the institution they represent perish
as a result? No. Will they be allowed to keep all of their bonuses which were
tied to short-term targets? Yes. There will be those that read this and will
argue that things have changed, that regulation has made a repeat of the
Financial Crisis impossible. There will be those that read this and will argue
that there is plenty of deterrent and that these banks represent a tiny
minority. Whatever merit those viewpoints have is irrelevant when we look at
the amount of money being taken from the pockets of taxpayers to supplement
these grand games of finance. Whilst it is suggested here that the pendulum has
already swung, any more crises in the near-future will cement this lack of
deterrent and confirm that the public will always pay the price for private
failures; financial regulation and financial penalties are thus obsolete in the
battle against venality and negligence in the financial sector – only extensive prison sentences, in real prisons, can stem this particularly
awful tide.

Friday, 23 June 2017

This short post today looks at the news that the rating
oligopoly – the three largest agencies; Standard & Poor’s, Moody’s, and
Fitch Ratings – has took aim at the Banking sector in Australia. The noises
coming from Australia in response are the same noises we hear again and again
when the rating agencies turn their collective focus towards a specific sector
or a specific region, namely that the ratings downgrade will ‘do
little to alter [the] costs of funding’. Yet, there is a much bigger issue,
and that is that the cost of borrowing is not the most important aspect, rather
the biggest issue is the safety net that the agencies and institutions
recognise as being the new norm – taxpayer assistance. In this post, we will
look at the current situation in Australia but we will also move back to look
at the pattern that keeps emerging: a sector does not perform as ‘experts’
predict that it should, rating agencies collectively smell blood in the water
and drop credit ratings, which becomes a self-fulfilling prophecy, and finally
the taxpayer of that given region must suffer the consequences – then the
agencies move elsewhere looking for blood in the water; this seems to be more
of a ‘plague’ than a financial service.

Recently, S&P cut the ratings of 23 small Australian
banks, citing the growing
risk of a sharp correction in property prices as the underlying factor in
its decision. However, the agency stated that it would not change the ratings
on the top four Australian banks – ANZ, Commonwealth Bank, National Australia
Bank, and Westpac – on expectations that ‘the
Australian government would support them if needed’. Yet, two days ago the
other dominant force in the rating oligopoly, Moody’s, downgraded the long-term
ratings of the Big Four banks, this time citing a rise
on household debt and slowing wage growth as the leading factors in its
decision. On the one hand, the agencies are zeroing in on a sector that has
been coming in for criticism regarding its lending practices – which ultimately
led to increased
regulation – and is also the subject of a controversial bank
levy, one which will see the big four banks and the Macquarie group (who we
know from a previous
post) subject to a $6.2
billion charge over a number of years. Yet, the banks, and a number of
external analysts, are keen to argue that the downgrades will not have any
effect, or very little at most, on their ability to borrow, with a analyst from
Deutsche Bank stating that he expected there to be ‘no
impact on funding costs’. However, this upbeat response is usually the
precursor to the next phase of the process – the rest of the oligopoly piling
on the pressure – which seems to be confirmed by the S&P Senior Director of
Financial Institutions Ratings, who recently stated that ‘there
is a chance we could downgrade the big four banks’ – the likelihood of this
happening is extraordinarily high, simply because of the dynamics of an
oligopoly.

However, there is an underlying sentiment to the ratings’
approach which is being accepted as normal, as something almost ‘natural’: the
agencies are quick to point out that they fully
expect the Australian State to bail-out the banks if necessary. Is this surprising?
The answer to that for anyone who has looked at the business section of a
newspaper during the last decade is a resounding ‘no’, but if we deduce the
content of these new pieces we can see an extraordinary pattern emerging that
consistently only has one loser – the public. One agency will pick up on public
information – supporting Partnoy’s claim regarding the scant
informational value these ratings hold – and actively downgrade the banks’
ratings; the banks will respond resolutely, but in doing so they attract the
attention of the media and other agencies, and they imminently follow suit in
downgrading the ratings; the State, having been pressured into becoming the
safety net but in reality not wanting to become a lender-at-first-instance,
plays down the prospect of ‘quantitative easing’ (bail-outs), which then
provides the fuel for rating agencies to downgrade the banks further, which in
turn forces the hand of the State to intervene to prevent a full-blown crisis.
What happens in this game? The financial actors walk away scot-free, because
this whole process is deemed to be part of economics, the rating agencies are
somehow justified in their initial warnings because the crisis they prophesised
happened, which in turn provides for reputational capital for the next time
they turn their gaze towards a sector or region, which leaves just one party –
the taxpaying citizen. In this game of ‘conscious
complexity’, the public are the safety net which make the whole charade
possible. The arrival of the oligopolistic stare in Australia spells bad news
for the pockets of Australian taxpayers, but they are not the first to be
affected by this organisational plague, and they will surely not be the last,
which provides little consolation to the Australian public.

Thursday, 22 June 2017

Here in Financial
Regulation Matters and across the U.K., with regards to those concerned
with Corporate Governance, the collapse of the large retailer British Home Stores (BHS)
has been a cause of great debate, and even greater consternation. The ease with
which the company fell, and the sheer arrogance of those who caused it, led to
Parliamentary investigations and a number of increasingly damning investigations
from Journalists, academics, and commentators. In February, in one of the first
posts here in Financial Regulation
Matters, we looked at the calls to make private
companies abide by the Financial Reporting Council’s Corporate Governance Code
(which is aimed at Public Companies only), whilst later
we also looked at the calls to enforce the implementation of workers and
stakeholders’ interests at Board level, together with the proposed binding-quality
of shareholder votes when it came to Executive compensation. If we take a look
back into the archives of posts, a growing trend of shareholder activism, or
perhaps shareholder responsibility,
was beginning to form in parallel to the stated claims from the Government with
regards to governance reforms. However, in the Queen’s Speech
yesterday, a ceremonial event that marks out the legislative agenda of a given
parliament, all of that momentum was brought to a screeching halt. In this post
we shall therefore assess this development, why it happened, and what it
ultimately means for governance reform.

The momentum referenced above will not be covered here, as
it is has been covered on multiple occasions in previous posts. However, the
governmental incarnation of that momentum will be covered, as it provides for
us an excellent example of a government paying lip-service in the wake of a
massive failure – what we then have to do is examine whether a. the government
had any appetite to enact such reforms in the first place, and b. what this
method of retroactive insincerity means for the hope of protecting the public
from further wrongdoing. In 2016, the Conservative Government laid out its
apparent aims for corporate governance in the U.K. with its ‘Corporate
Governance Reform Green Paper’, which began with a smiling Theresa May
explaining to us that ‘for many ordinary working people – who work hard and
have paid into the system all their lives – it’s not always clear that business
is playing by the same rules as they are’. To counteract this the Government
then pledges to set out ‘a new approach to strengthen big business through
better corporate governance’, which would take the form of focusing upon ‘ensuring
executive pay is properly aligned to long term performance, and raising the bar
for governance standards in the largest privately held companies’. In
demonstrating her neo-liberal philosophy, May continues by stating that ‘these
are issues which are bout competitiveness, and creating the right conditions
for investment, as much as they are issues about fairness’. Leaving aside this
ludicrously patronising sentiment, and the pathetic denial of the devastating
effect governance failures have upon people like the 11,000 who lost
their pensions in the BHS scandal, the importance of the contents of these
green paper make for extraordinary reading because, to all intents and
purposes, it represents the attempt of Theresa May to bring her promises of
protecting ‘ordinary people’ – the nuanced effect of the repeated use of this
term is incredible - from the actions of ‘unscrupulous
company bosses’ to reality.

The green paper suggests that binding votes would enable
shareholders ‘to hold executives to account for performance on an annual basis’,
which it continues by suggesting that the development would also encourage
increased shareholder engagement, which is argued is crucial to good corporate
governance. A good start. The paper then goes on to discuss the ineffectiveness
of ‘Long-Term Incentive Plans, and suggests that some incarnation of extending
the period for Executives retaining share awards would help; it asks for more
assistance from stakeholders and professionals/academics in this regard. So far
so good. The paper then looks at the issue of employee and stakeholder
engagement, and proposes a number of options, including creating ‘stakeholder
advisory panels’, designating non-executive directors to be specified liaisons
with employees and interest groups, and also appointing individual stakeholders
on the Board. Promising! Yes, promising indeed, until yesterday when the focus
on Brexit and backtracking on magnificently awful suggestions during the
election campaign trumped corporate governance concerns entirely.

In the media, a spokeswoman for the constantly
title-changing Department for Business, Energy & Industrial Strategy (BEIS)
stated that the Department was ‘still to respond’ to the Green Paper (when
consultations concluded in February) and that they will outline their response ‘in
the coming months’. The fears
that emanated before the Queen’s Speech have been justified, and quite
rightly have caused a vociferous reaction, with the Trades Union Congress (TUC)
arguing that ‘people
are fed up with one corporate scandal after another and reform is long overdue’;
the absolute absence of Corporate
Governance reform in the Queen’s Speech means that, for the next couple of
years at least, there will be little change to the regulatory framework in the
U.K.

Ultimately, there are a number of ramifications to this
development. One is that it is clear that the electorate do not punish
lip-service; this is not the first time that those in the Conservative
Government (and if we are to be fair, nearly all political parties) have said
one thing and then done another. Another aspect is that the regulatory
framework will now not be altered until the Brexit negotiations have concluded,
which is both a positive and negative: positively, it allows for the Government
to react to the new environment with a newly enhanced framework; negatively, it
allows for the Government to react to the new environment with a newly enhanced
framework – the fears that the Government will turn the Country into a
tax-haven can be realised by a new and more
lenient regulatory framework. The absence of governance reform also
demonstrates the belief of the political elite that ‘ordinary people’ do not
understand or have the appetite to care about corporate governance, and they
have thus focused on more politically visible issues like Brexit, and energy bills.
However, this is a reality created by
the political elite’s rhetoric, combined with the assistance of the mainstream
media – in reality, people do care
greatly about corporate governance and the effect it has on their employment,
their pensions, and many other aspects; the reality
is that affecting corporate governance reforms will reduce the profit and
bonuses of big business, and this is simply not an option for the Conservative
Government because, as Theresa May so nonchalantly declares, ‘the
Government I lead will be unequivocally and unashamedly pro-business’ –
perhaps this represents the other end of the scale to the notion of ‘ordinary’
that she so patronisingly refers to.

Wednesday, 21 June 2017

Here in Financial
Regulation Matters, we have discussed the Serious Fraud Office (SFO) on a
number of occasions. Whilst this author has discussed the viability
of the Office within a different regulatory framework, the most recent focus on
the Office is arguably the most important issue with regards to the SFO. On the
18th of May we looked at the Conservative Party’s pledge to dissolve
the SFO and merge it into the National Crime Agency, something which was
suggested represented the culmination of Theresa May’s incessant quest to quash
the SFO stemming from her time as Home Secretary. Whilst the general election
result puts the Conservative Party’s pledges up in the air, somewhat, yesterday’s
announcement – one which was eagerly awaited – shows that the SFO, and its
Director David Green,
will not be going down with a whimper… far from it. Yesterday morning, the SFO announced
that it has charged Barclays and four individuals associated with the Bank –
John Varley (former CEO), Roger Jenkins, Tom Kalaris, and Richard Boath – with ‘conspiracy
to commit fraud and the provision of unlawful assistance’. So, in this
post, we will look more closely at the decision to press charges, but also
expand our lens to look at what this potentially unprecedented move means for
the SFO, for the regulatory framework, and for creating a deterrent for
financial transgressions moreover.

As the Financial Crisis developed in 2007 and 2008, a number
of banks faced the prospect of needing excess liquidity just to function, as
was the nature of the so-called ‘credit crunch’. During this time, it was
decided by British and American Treasury Officials that a program of ‘quantitative
easing’ – more colloquially known as ‘bail-outs’ – was required and, as such, a
number of banks accepted this taxpayer-backed liquidity for stakes in their
organisations; we have
discussed already how Lloyds Bank have just returned to the private sector
after nearly a decade of public ownership (in part), whilst RBS represents the
other end of the scale entirely. Yet, one notable bank refused the public
investment and instead sought a private capital injection to survive the
financial storm. In June 2008, Barclays turned to the Qatar Investment
Authority for investment and, in conjunction with a number of other investors
the Bank raised
£4.5 billion to stave off the negative financial environment at that time. Yet,
the original narrative was that the bank had just chosen to remain private and
the Qataris had invested legitimately in a massive British banking institution,
but this apparently was not the case at all. The SFO has nailed it colours to
the mast by alleging that the bank and the investors were engaged
in side-deals whose details were not made public, with the actualities
being that at the same time the Bank received the investment from the Qatari
investment vehicles, the bank promised to pay the investors £322 million in the
shape of advisory services for ‘helping
to develop business in the Gulf’, as well as providing a $3 billion load
facility to the State of Qatar. The Financial Conduct Authority is conducting a
parallel
investigation into improper disclosure, but is awaiting the development of
this much more serious case before proceeding, which underlines the seriousness
of the SFO’s approach. This seriousness, and also the special nature of the developments,
is perhaps better signified in numbers: John Varley faces a maximum of 22
years in Prison for his crimes, whilst the other defendants each face a
maximum of 10 years in Prison, on top of a fine for the Company.
Understandably, this action which essentially marks the only criminal
investigation and charge relating to the Financial Crisis (institutionally
speaking at least – lest we forget Kareem
Serageldin) is sparking plenty of debate.

One analyst confidently stated that he does not expect the
bank to ‘seriously
penalised… for the sins of the preceding regime’, whilst one commentator
argues alternatively saying that to focus on the timing of the crime, and the
fact that the bank avoiding receiving taxpayer money, ‘misses
the point’, with the ‘point’ being that SFO must prosecute on the evidence
it sees. What is becoming a general theme however is the impressive courage
being displayed by the SFO, with a Partner at Irwin Mitchell stating ‘taking
on Barclays… sends a very strong message that the SFO is now fearless in terms
of the companies and individuals it pursues’. This theme is similar to the
one advanced here in Financial Regulation
Matters months earlier: the SFO is steadily demonstrating that it has the
capacity to stand up for justice in this transgressive arena and make moves
which many regulatory bodies would steer clear from, for a number of negative
reasons like the ‘revolving door’ theory. However, this praise that the SFO is
garnering is consistently overshadowed by Theresa May’s crusade against it so,
widening our lens ever so slightly, what does this dynamic demonstrate.

Theresa May was emboldened as she stood in front of Number
10 Downing Street, confidently calling the snap election. The accepted
understanding was that the Conservative Party were so far ahead in the polls,
and ahead of a Labour Party in disarray, that their leader could begin to
really aim for her desired policies. It was in this confident mode that the
Prime Minister made it clear that this non-ministerial department, one which had
only recently made quite an impact with its investigations
into Rolls Royce and Tesco, was not doing well enough and needed to be
subsumed into the National Crime Agency. What this demonstrates is the sentiment behind Theresa May’s
leadership and the Conservative Party she leads: it is not about National
Interest, but curtailing efforts to apply the law and general rules evenly. The SFO is actually leading the
charge against fraud, something which the U.K. is beginning to lead the world
with in terms fraud within its borders, and as a result of that the Prime
Minister wants to shut it down – the equation is simple and clear to see. Yet,
these intimidatory tactics have, thankfully, failed. Whilst there is a real
possibility that even with a conviction no one will go to Prison, the sentiment
and constitution not to be bullied by those who champion private interests
against the interests of the public, are to be praised. In April this author
stated that the SFO could be the spearhead of a new regulatory framework, and
the more it continues to pursue those who believe they are above the law, the
more that proposition proves all the more sensible. If Theresa May does not
survive the political cauldron she is currently inheriting, then the next
leader of the Country must give the SFO more
funds, not reduce it. It must give the SFO more than £30 or £40 million a year,
because doing so sends an incredible message: there are people willing to
uncover and punish fraudulent behaviour, and they have the resources with which
to do so – the sooner that situation becomes reality and we move away from this
private-interests-first narrative that is wreaking havoc in all walks of life,
the better society will be.

Sunday, 18 June 2017

Today’s post looks at the issue developing in the corporate
world concerning multiple Chairmanships, particularly with regard to leading
companies. Following on from investor unrest regarding the positions held by
the Chairman of Tesco, which will be discussed in this post, recent investor
action against the positions held by Renault-Nissan Chief Carlos Ghosn is
keeping this issue in the headlines. So, in order to make sense out of this we
will examine the two stories and look at how reasonable it is for one person to
hold multiple Chairmanships; with the recent and relative rise of shareholder
activism, it is likely that this issue will continue to arise.

Before we look at the issues within the French car
manufacturer, we need to revisit someone who we have discussed before here
in Financial Regulation Matters, and
that is the Chairman of Tesco, John Allan. Rather than focus on his comments
regarding gender equality, as we have already done, the turn of the year
represents a great example of the problem at hand here. In September last year,
Allan had to take action so as not to become ‘the
U.K.’s only triple chairman of FTSE 100 companies’. In removing himself
from the role of chairman and taking up the position of non-executive director
in the payments group Worldpay, Allan
had sought to pre-empt what ‘might well be a negative reaction to somebody
attempting to be the Chairman of three FTSE 100 companies’, although he does
remain as the chairman of London First, a business lobby group, albeit non-FTSE
100. However, this pre-emptive movement to avoid being a triple-chairman has
not stopped investors at Tesco focusing on his other Chairmanship, namely that
of Barratt Developments, a
leading property builder. A number of institutional investors in Tesco are alleging
that as Chairman of such an expansive company like Tesco, Allan should be ‘devoting
considerable time to the role’ which, through a proposed opposition to
Allan’s reappointment as Chairman, the investor group notes is ‘considered to
be crucial to good governance’. The group make the point, rather emphatically,
that a Chairman must be present and devoted as they are, ideologically speaking,
‘responsible for the culture of the board’ and that without that leadership the
board may be, at best, inefficient and, at worst, negligent or transgressive.
The source of that fear is obviously the recent
accounting scandal at Tesco, but the notion of Director responsibility is a
truly important one when considering what ‘governance’ actually is, and also
how best to achieve it – although different in nature, the situation on the
other side of the Channel also brings this issue into focus.

Earlier this month, the French financial markets regulator,
the Autorité des Marchés Financiers (AMF), received
a 24-page letter from three shareholder activist groups requesting for
Renault-Nissan to be put under review for potential conflicts of interest at
Board level, and also possible governance breaches. The main target of the
request, the embattled
Renault CEO and Chairman Carlos Ghosn, is also currently the Chairman of Mitsubishi
and Chairman of Nissan – he was also the CEO of Nissan up until last year –
which amounts to an incredible workload leading these sector-leading companies.
Although there are suggestions Ghosn is preparing
his successor so as to facilitate the cohesion between the companies when
he steps down, this has not stopped investor groups seeking investigation into
the workings of the Board at Renault. Demonstrating their motive as
institutional investors, the group of three state that ‘we believe an
investigation is urgently needed to uphold the rights of Renault shareholders’,
with the main focus being on the ‘creeping
transfer of powers’ to a Dutch-listed joint venture between Renault and
Nissan which, according to the three investor groups, has resulted in a
reduction in ‘adequate
governance mechanisms or protections for Renault shareholders’. Though the
AMF have refused to comment so far, the recent tension between the then-Finance
Minister Emmanuel Macron and Ghosn – as the French Government owns a 20% stake
in the company – potentially indicates a rough ride for Ghosn now that Macron
is President. Ultimately, the role of the Chairman is coming into view more and
more, and this is a positive element.

It is a positive element because it is important that we
seek to ask some serious questions if we are to achieve good governance more
generally. In order to provide for some sort of societal balance, a number of
actors must fulfil their roles adequately and, in terms of the business arena,
it seems as if though institutional investors are finally stepping up to the plate, as we have already discussed here
in Financial Regulation Matters. In
order for big business to behave in a sustainable and socially-considerate
manner, the culture that begets that
ideal must be set at the very top – in light of that, how likely is that to
happen if the Chairman is concurrently running two, three, or even more
companies at the same time? Whilst institutional investors will call for capped
Chairmanships to protect their own position, as is their right, the enforcement
of capped Chairmanships would likely have a positive societal effect also. It
is important that the leading supermarket is controlled with complete focus
given its centrality to a given society, and it is vital that one of the leading
manufacturers of cars is controlled with complete focus, particularly given the
environmental impact of failings in this area i.e. Volkswagen’s infamous struggles in this area. Hopefully,
the investors increase the pressure they are putting these large companies
under to force regulators to take action, because without that pressure only
scandal can affect change, which is a particularly negative dynamic.

Saturday, 17 June 2017

In this post, the focus will be on the recent decision by
Moody’s to upgrade RBS’ credit rating, citing their ability to withstand future
penalties for financial crisis-era transgressions. With RBS having been covered
on a number of occasions here in Financial
Regulation Matters, this post will take a different view of the Bank and
look at the pending future it has. The question stemming from the recent
upgrade is whether it indicates that the settlement with the U.S. Department of
Justice (DoJ) will be as the bank expects, which is what Moody’s believe, or
whether it will be much more, with the likely result being an incredible blow
to the Bank’s attempted recovery.

RBS was central in the Financial Crisis, and this is
confirmed by the number of penalties and settlements it is facing. There were
arguably three remaining hurdles in this sense up until recently (it has
already faced and paid a number
of fines since the Crisis), with one of those hurdles falling by way of the agreed
settlement with investors who were fraudulently led into investing in the
Bank in 2008. Yet, it seems as if the 82p per share paid to those investors
will pale in comparison with what is coming. Only last week was it reported
that the Bank is in advanced
settlement talks with the Federal Housing Finance Agency in the U.S., which
is concerned with the mis-selling of mortgages to Fannie Mae and Freddie Mac.
The news report suggests that the settlement will be around $4.5 billion,
although there are fears that this could be much higher. Yet, the biggest
penalty on the horizon comes from the DoJ, with reports suggesting that RBS
investors would actually be happy
if the fine was around $10 billion, which would suggest the penalty will be
much higher; it has been suggested that the Bank has put aside around
$6 billion for future penalties, but the fears surrounding the DoJ’s
decision, together with its recent punishment of Deutsche Bank for just
over $7 billion, could lead one to suggest that $6 billion may not be
enough, given how entrenched RBS were in the scandal. However, all of this
uncertainty, something which is massively frowned upon in the capital markets,
has not stopped Moody’s from increasing the Bank’s rating.

With regards to the rating agency’s assessment of the bank’s
long-term creditworthiness, the agency has increased the rating to Baa3 – its
lowest investment grade – stating that the increase reflected the bank’s ‘strong
capital and litigation reserves levels’. The agency also suggested that the
bank now has ‘sustainable earnings from core retail and corporate businesses’
which would offset any pressure emanating from Brexit. It should come as no
surprise that the Bank is overjoyed
with this new rating, but there are a number of factors which would suggest
that the rating is, perhaps, premature. Whilst there are educated guesses as to
the amount that will be owed after settling with two of the U.S. agencies
pursuing the bank, it is difficult to state with any certainty whether the DoJ
will agree with the $10 billion being quoted beforehand. Also, as reported
recently, the Bank is still facing up to thirty
other penalties and settlements, with just one being the ramifications of the
now defunct ‘Global Restructuring Group’, for which the bank has, reportedly, already
set aside £400 million to cover those costs. With all this in mind, it is
difficult to say with any certainty whether the bank is currently ‘investable’.

Ultimately, this current gap in between the rating
assessment and the revealing of future events is the raison d’être of the
rating agencies. Yet, as we have spoken about on a number of occasions, the
rating agencies have suffered great damage to their reputation so it will be
interesting to see whether investors pay attention to this particular rating
change; usually, investors will, but the difference here is that the future
facing RBS is particularly bleak – will investors trust their money to the ‘opinion’
of a rating agency irrespective of the mounting evidence that says RBS is far
from the edge of the woods? However, Moody’s rating could indicate the opposite
– it may be the case that the agency has reason to be confident that the DoJ
will go easy on RBS, which will be good for the bank but negative in terms of
establishing effective deterrents. In related news, the DoJ is slightly behind
with regards to RBS, as the dismissal of Attorney General Sally Yates in
January, followed by the appointment of Jeff Sessions, resulted in a delay
in proceedings, whilst further amendments to the way in which settlements
are distributed – Obama championed distributing settlement proceeds amongst
victims and also community groups, whilst Trump favours distributing them
amongst victims only – are also holding
the RBS case up. In that sense there is a potential that RBS will profit
greatly from the Trump Administration and the re-establishment of
neo-liberalism in America which, when we consider just how central RBS were and
how they have continued to transgress after the Crisis, would be a really
depressing reality to bear witness to; hopefully, the DoJ makes an example out
of RBS, although the best example would be to put the leading members of the
2007/8 RBS board on trial. It is likely the other end of that scale will be
seen, however.

Wednesday, 14 June 2017

This post reacts to the news yesterday that the E.U. is developing
plans to house the massive €1.2 trillion ‘clearing’ market wholly within its
jurisdiction post-Brexit, putting the City of London’s position as leader
in this market in great peril. In this post we will review the obviously formidable
response – including citing
global systemic risk – but we shall also look at the underlying tone of the
E.U.’s attempted move and what, in reality, it means for Britain as it heads,
tepidly, into its negotiations with the E.U. over the terms of its secession –
it seems the ‘freedom’
that was promised can only be achieved at the same time as experiencing
remarkable loss and, assuming that “Leave” voters want to continue experiencing
the trappings that come with a prosperous nation, everything will pretty much
stay the same as before, except for one crucial difference.

The manoeuvrings in Brussels represents two things,
arguably, for the British. The suggestion of relocation reminds the British
that Brexit negotiations will be on European terms, and not British terms.
However, it also serves as a dose of realism to the British and to any other
member thinking of leaving – in order to have access to the benefits of the
E.U., one must abide by European rules and regulations… there is no other
option. In reality, a member leaving the bloc will, having been integrated into
its system and used to its benefits, have no
choice but to abide by the rules, with the only difference being that the
right to do so will cost more. The
posturing by the E.U., which is being supported by private institutions by way
of pre-emptive
relocations, is no doubt a signal to the British negotiating contingent
that a ‘hard-Brexit’ will be a painful-Brexit. Of course, it is the right of
the bloc to do this and, arguably, it must do this so as to serve as a
deterrent to other members – members of a bloc must feel that their future is
better in the bloc rather than outside of the bloc, this should be
obvious – but, in terms of the British who voted “leave” in June 2016, it will
surely start to dawn on them that the claims sold by the Brexiteers were simply
unobtainable (which is probably why the Conservative Party lost their majority
in the last election). The £350 million a week that will be reinvested in the
NHS, Supremacy of British Law, cuts to immigration, border controls, and the host of
other claims advanced by the ‘leave’ campaigners are, in reality, being
proven to be nothing more than empty rhetoric. Today’s news, as just one
example, demonstrates that in reality the British people will be exposed the
very same European Union that they voted to leave, but it will cost them more
for the privilege – it seems the dismissal of recognised referenda theory – that there should be
two referenda, spaced years apart - will have lasting effects.

Tuesday, 13 June 2017

Today’s post looks at the recent news that, according to the
Financial Ombudsmen Service in the U.K., complaints over the last year
regarding so-called ‘payday loan’ companies have increased
by an incredible 227%, whilst complaints relating to consumer credit more
broadly have increased by almost 90% to around 26,000. We have looked at this
issue before here in Financial Regulation
Matters on a number of occasions – most notably with regard to the Financial
Exclusion Committee – so today we will assess these increases and the
supposed rationale for them. However, as is usually the case when we look
closer at any issue, there is a growing underlying issue which is intensifying
at every turn.

The figures released by the Financial Ombudsman Service relate
to most sources of credit, with the majority of complaints still being
concerned with Payment Protection Insurance. Whilst some areas for complaint in
relation to credit went down – complaints about banks for example – the general
rise in relation to personal credit has been described as ‘striking’
by the CEO of the Financial Ombudsman Service, which follows on from the
warning from the Bank of England earlier this year on the rapid
expansion of personal credit in the marketplace. It has been suggested that
one of the reasons for such a rapid increase is the availability
of credit now, in conjunction with the increased
knowledge of consumer rights, although this has been countered by
attempting to understand the wider issues. Writing in The Independent, one commentator notes
how ‘increases in the cost of essentials such as children’s clothing, and food,
have started to play an important role in the inflation figures’, which he then
continues to state that ‘if you’re struggling, if it’s a choice between a
high-interest loan and not feeding your kids, what are you going to do?’. The
picture painted by the commentator is bleak, but we must examine it to see if
it holds up.

The Conservative Manifesto contained a pledge to remove the
ability to eat a free school lunch from over 900,000 children, a move which the
Education Policy Institute confirmed would affect children coming from ‘ordinary
working families’. This came after the move to end universal free school
lunches for infants – replacing them with free breakfasts instead – which will
cost the families of those affected £440 per child per year and save the
Government £650 million per year, a move which ‘risks
punishing exactly the kind of families the prime minister has promised to help’.
This post has chosen the subject of ‘children’ as its focus, but in reality it
could be anything – mental health, disability, discrimination – society is
being torn apart by the incessant quest to have the country pay for the actions
of the elite during the turn of the century. Reports like that of the Institute
for Fiscal Studies, that May’s welfare cuts will push ‘almost
one million more children into relative poverty by 2022 and two thirds of those
affected will live in working households’, do not seem to stemming the
tide. The connection between looking at young families and payday loans is
worthwhile because, as the commentator implied earlier – people will turn to high-interest lenders when
it comes to caring for their children. The policies of this government are
concertedly putting these ‘just about managing families’ into that predicament,
which is likely the underlying reason for the Conservative Party failing to win
a majority in the recent election – the recent statement by the Prime Minister’s
new Chief of Staff, Gavin Barwell, that the Party has to look at ‘ending
austerity’, is a clear indicator that the well is beginning to dry up. When
it comes to denying children free lunches at infant schools, it is clear that
there is nowhere left for the Government to go in their mission to have the
country pay for the costs of the few. As has been repeated before here in Financial Regulation Matters, the focus
is on the Conservative Party because they are in power and their actions must be
scrutinised, but when Children are potentially going hungry whilst in a place
of mandated education, enough is surely enough. The suggestion by the Financial
Conduct Authority, that the cap on charges by payday loan companies – which has
seen their numbers reduce – should
be lifted so as to avoid ‘illegal lending’, however, suggests that the
powers that be do not agree that is enough is enough, which is an incredible
thought when one looks at the ferociousness of this assault that is labelled as
‘austerity’; who else can be disadvantaged in its name?

Contributions are welcome to this blog. If you would like to contribute regarding any area of financial regulation, then please feel free to email me and submit your blog entry. The content should be concerned with financial regulation, and why it matters, but this is broadly defined. The blog is open to all who are professionally concerned with financial regulation, which may range from an Undergraduate Student interested in writing on the subject, to Professors and industry participants.